Monday, July 07, 2008

The U.S. government's inflation statistics are coming under increasing scrutiny as holders of TIPS (Treasury Inflation Protected Securities) wonder why they are being left behind. Social security recipients are probably wondering the same thing after getting just a 3.3 percent raise in 2007 and a 2.3 percent boost in 2008.This Bloomberg report tells of the increasing difficulty investors are having in staying ahead of inflation which is produced by the government, using inflation protection which is provided by the government.

Treasury Inflation Protected Securities aren't living up to their name for bond investors who say they can't trust the way the U.S. government calculates the rising cost of consumer goods.Morgan Stanley, the second-biggest securities firm, and FTN Financial, a unit of Tennessee's largest bank, are telling clients to pare holdings of TIPS, whose principal amount rises with the Labor Department's consumer price index...."The consumer price index underestimates inflation," said Jeremy Wolfson, who oversees $8.5 billion as chief investment officer at the City of Los Angeles Department of Water and Power Pension Fund. "Whether TIPS are adding a true inflation hedge, that's arguable based on the CPI component of it."

The story also notes a recent study by Federal Reserve economists arguing that inflation is overstated by almost one percent, an argument that Fed chief Ben Bernanke has also made before Congress not long ago.

The "inflation disconnect" between economists and the real world has never been wider.

Anyone looking for real protection from inflation should avoid the government's offering and look to what Mother Nature has provided in gold.Things seem to have changed dramatically since the stock market bubble was swapped out for a housing bubble earlier in the decade.

Surely there are some good organized crime metaphors on the subject of the government's inflation "protection racket"...